Trican- 2008 Fourth Quarter and Year End Results
- Press Release
- Source: Trican Well Service Ltd.
- On 8:55 pm EST, Wednesday March 4, 2009
CALGARY, ALBERTA--(Marketwire - March 4, 2009) - Trican Well Service Ltd. (TSX:TCW - News):
Financial Review
($ millions, except per share amounts)
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Three months ended December 31, Years ended December 31,
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2008 2007 2006 2008 2007 2006
(unaudited) (unaudited) (unaudited)
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Revenue $ 322.8 $ 195.8 $ 208.3 $ 1,016.1 $ 836.4 $ 847.5
Operating
income(i) 73.2 34.2 61.3 181.8 195.1 284.2
Net
(loss)/income (95.3) 18.2 35.3 (70.4) 111.8 172.6
Net
(loss)/income
per share
(basic) (0.76) 0.15 0.31 (0.56) 0.93 1.50
(diluted) (0.76) 0.15 0.30 (0.56) 0.91 1.44
Adjusted net
income(i) 39.6 21.4 37.9 73.3 124.5 183.6
Adjusted net
income
per share(i)
(basic) 0.32 0.18 0.33 0.59 1.03 1.60
(diluted) 0.31 0.17 0.32 0.58 1.01 1.55
Funds
provided by
operations(i) 79.9 41.8 63.5 167.1 131.8 226.5
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Notes:
(i) Trican makes reference to operating income, adjusted net income, adjusted net income per share and funds from operations. These are measures that are not recognized under Canadian Generally Accepted Accounting Principles (GAAP). Management believes that, in addition to net income, operating income, adjusted net income, adjusted net income per share and funds from operations are useful supplemental measures. Operating income provides investors with an indication of earnings before depreciation, taxes and interest. Adjusted net income provides investors with information on net income excluding the non-cash affect of stock-based compensation expense and one-time impairment charges. Funds provided by operations provide investors with an indication of cash available for capital commitments, debt repayments and other expenditures. Investors should be cautioned that operating income, adjusted net income, adjusted net income per share and funds from operations should not be construed as an alternative to net income, net income per share or net cash provided by operations determined in accordance with GAAP as an indicator of Trican's performance. Trican's method of calculating operating income, adjusted net income, adjusted net income per share and funds from operations may differ from that of other companies and accordingly may not be comparable to measures used by other companies. Refer to the table at the end of this report for a reconciliation of adjusted net income.
FOURTH QUARTER HIGHLIGHTS
Trican's consolidated revenue increased 65% for the three months ended December 31, 2008 compared to the same period in 2007. Before the impact of one-time charges and stock-based compensation, net income for period was $39.6 million. The Company recorded a net loss for the period of $95.3 million compared to net income of $18.2 million recorded in the fourth quarter of 2007. Similarly, the Company recorded a loss per share of $0.76 ($0.76 diluted) versus earnings per share of $0.15 ($0.15 diluted) for the comparable period in 2007. Before the impact of one-time charges and stock-based compensation, earnings per share for the period was $0.32 ($0.31 diluted). Funds from operations increased 91% to $79.9 million from the comparable period of 2007.
Operating results for the quarter reflect increased work in the unconventional natural gas plays and oil prospects in Western Canada, strong demand for services in Russia, and increased utilization levels in the United States.
Revenue in Canada increased 58% compared to the fourth quarter of 2007 as Trican benefited from increased work in unconventional natural gas plays which require more fracturing services than traditional Western Canadian Sedimentary Basin well completions.
Demand for our services in Russia continues to be strong as revenue increased by 27% compared to the fourth quarter of 2007. Operating income as a percentage of revenue increased to 19.6% from 13.5% in the fourth quarter of 2007 as a result of the effective implementation of cost control programs earlier in the year. Fourth quarter Russian results also reflect the completion of some of our customers' 2008 work programs, a change in customer mix resulting in smaller fracturing job sizes, an expanded service offering and a reduction in the price of fuel near the end of the year.
Demand for services in our areas of operations within the United States showed strong growth in activity levels as evidenced by a 211% increase in revenue compared to the fourth quarter of 2007. The primary factor in this growth was the resolution of the sand supply issues as first reported in our third quarter 2007 results. Increased operational leverage from the growth in activity led to an improvement in margins as operating income as a percentage of revenue increased to 23.8% from 14.3% compared to the fourth quarter of 2007. Although demand remained strong during the fourth quarter, low natural gas pricing has led to an increasingly competitive pricing environment as pressure pumping companies compete to maximize fleet utilization.
In accordance with accounting pronouncements, the company reviewed the carrying value of the investment made in our US operations. The nature of this review is to examine the carrying value relative to the company's year end equity value. With the significant decline in the worldwide financial markets and the resulting impact on the share value of all public companies including Trican, the company was compelled to realize an impairment on the goodwill recorded on the acquisition of its US operations. The same economic conditions also resulted in management re-assessing the carrying value of a loan issued to an unrelated third party.
As a result, impairment provisions of $180.0 million relating to goodwill and $18.5 million relating to the unrelated third party loan were recognized. Management is of the opinion that our US operations remains a key market for Trican with its presence in many of the low cost unconventional natural gas plays in the US and the potential for additional growth opportunities in the future. However, the near term economic uncertainty facing our US operations has created an environment where our US operations goodwill and a portion of the unrelated third party loan are considered impaired for accounting purposes.
Effective March 5, 2009, Michael Kelly will assume the role of Senior Vice President, Corporate Development. In this role, he will be responsible for the evaluation and oversight of Trican's ongoing business development, international expansion and M&A activities. Concurrent to this appointment, Michael Baldwin will assume the responsibilities of the Chief Financial Officer and his title will be Vice President Finance and CFO.
COMPARATIVE QUARTERLY INCOME STATEMENTS
($ thousands, unaudited)
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Quarter-
Over-
Three months ended % of % of Quarter %
December 31, 2008 Revenue 2007 Revenue Change Change
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Revenue 322,823 100.0% 195,794 100.0% 127,029 65%
Expenses
Materials and
operating 232,417 72.0% 151,595 77.4% 80,822 53%
General and
administrative 17,186 5.3% 10,036 5.1% 7,150 71%
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Operating income(i) 73,220 22.7% 34,163 17.4% 39,057 114%
Goodwill impairment 179,771 55.5% - - 179,771 100%
Other asset
impairment 18,454 5.7% - - 18,454 100%
Interest expense 2,323 0.7% 2,764 1.4% (441) -16%
Depreciation and
amortization 28,169 8.7% 17,801 9.1% 10,368 58%
Foreign exchange
gain (6,352) -2.0% (1,352) -0.7% (5,000) 370%
Other expense 1,085 0.3% 55 0.0% 1,030 1873%
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(Loss)/income before
income taxes and non
controlling
interest (150,230) -46.5% 14,895 7.6% (165,125) -1109%
Provision for income
taxes (54,894) -17.0% (3,287) -1.7% (51,607) 1570%
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(Loss)/income before
non-controlling
interest (95,336) -29.5% 18,182 9.3% (113,518) -624%
Non-controlling
interest (38) 0.0% 28 0.0% (66) -236%
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Net (loss) / Income (95,298) -29.5% 18,154 9.3% (113,452) -625%
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(i) see first page of this report
Effective January 1, 2008, we have realigned the structure of our financial reporting to better reflect the way in which management oversees the business. Formerly we provided comments on the operations and financial results of our Well Service, Production Services and Corporate Divisions. Effective January 1, we are now providing comments by our operating divisions: Canada, Russia, United States and Corporate. Algerian and Kazakhstan operations are included in the results for the Russian operations. Prior year information has been restated for comparative purposes.
CANADIAN OPERATIONS
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Three months ended,
($ thousands, Dec. 31, % of Dec. 31, % of Sept. 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Revenue 175,194 110,928 158,766
Expenses
Materials and
operating 120,867 69.0% 80,553 72.6% 111,011 69.9%
General and
administrative 7,498 4.3% 4,536 4.1% 5,154 3.2%
--------- -------- --------
Total expenses 128,365 73.3% 85,089 76.7% 116,165 73.2%
Operating income(i) 46,829 26.7% 25,839 23.3% 42,601 26.8%
Number of jobs 6,028 5,995 6,574
Revenue per job 29,193 18,764 24,271
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(i) see first page of this report
Sales Mix
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Three months ended, Dec. 31, Dec. 31,
($ thousands, unaudited) 2008 2007
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% of Total Revenue
Fracturing 58% 44%
Cementing 20% 29%
Coiled Tubing 6% 9%
Nitrogen 6% 6%
Acidizing 4% 5%
Other 6% 7%
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Total 100% 100%
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Operations Review
Industry activity during the fourth quarter of 2008 increased on a year-over-year comparison but decreased on a sequential basis.
Canadian industry activity, as measured by the average number of active drilling rigs, increased 13% for the quarter relative to the same period in 2007. Demand for services was strongly influenced by the emergence of unconventional natural gas plays in western Canada and oil prospects in southern Saskatchewan. Work performed in these areas require more fracturing services that are typically larger in size and generate higher revenue per job and operating margins than traditional Western Canadian Sedimentary Basin well completions. We have been very active in these areas, and our significant operating capacity and technical expertise position us well to service these unconventional gas and oil plays.
As expected, sequential activity levels decreased with softening commodity prices combined with normal seasonal slow down towards the end of the year.
Current Quarter versus Q4 2007
Revenue for the quarter increased 58%, to $175.2 million, reflecting the increase in fracturing activity and size of jobs relative to last year.
Revenue per job increased to $29,193 from $18,764. This increase reflects the much larger fracturing jobs performed in unconventional oil and gas plays in western Canada, partially offset by higher discounts that have been driven by a more competitive pricing environment.
Materials and operating expenses for Canadian operations declined as a percentage of revenue to 69.0% compared to 72.6% for the same period in 2007. An increase in the number of higher margin jobs, an increase to our price book effective November 1, 2008, and increased operational leverage have resulted in the decrease in materials and operating expenses as a percent of revenue. This was partially offset by higher average discounts offered to customers as a result of an increasingly competitive environment. General and administrative expenses increased due to an increase in our bad debt provision, higher profit sharing expense and higher stock based compensation expense.
Current Quarter versus Q3 2008
Revenue increased sequentially as a direct result of higher revenue per job that was partially offset by lower job count attributable to customers' wrap up of 2008 work programs. Revenue per job increased by 20% compared to the third quarter of 2008 due to a greater proportion of work performed on unconventional natural gas plays and implementation of a price book increase. Materials and operating expenses decreased slightly as a percentage of revenue to 69.0% compared to 69.9% for the third quarter of 2008. The slight decrease reflects a price book increase that positively impacted margins. In dollar terms, general and administrative expenses increased $2.3 million due mainly to an increase in profit sharing expense and our bad debt provision.
RUSSIAN OPERATIONS
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Three months ended,
($ thousands, Dec. 31, % of Dec. 31, % of Sept. 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Revenue 79,997 63,085 80,331
Expenses
Materials and
operating 60,924 76.2% 52,947 83.9% 62,724 78.1%
General and
administrative 3,356 4.2% 1,607 2.5% 1,775 2.2%
--------- -------- --------
Total expenses 64,280 80.4% 54,554 86.5% 64,499 80.3%
Operating income(i) 15,717 19.6% 8,531 13.5% 15,832 19.7%
Number of jobs 775 492 811
Revenue per job 103,284 129,205 99,150
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(i) see first page of this report
Operations Review
Russian operations, which for reporting purposes include operations in Kazakhstan and Algeria, achieved strong growth in activity levels during the quarter.
Additional fracturing and cementing capacity, as well as the introduction of coiled tubing services, drove higher levels of activity in the quarter relative to the same period last year.
Undertaking pricing reviews with major customers and implementing a cost control program to reduce personnel, administrative and infrastructure costs resulted in stronger operating margins for the quarter when compared to the previous year. The Company's West Urals base in Perm was closed late in the quarter. Future work programs in this region will be serviced from other bases.
Current Quarter versus Q4 2007
Revenue for the quarter increased 27% to $80.0 million, reflecting a 58% increase in job count partially offset by a 20% decrease in revenue per job. The higher job count was due to additional equipment capacity in the fracturing and cementing service lines as well as the introduction of coiled tubing services. Revenue per job decreased relative to last year due to a greater proportion of cementing and coiled tubing jobs, and customer mix changes resulting in smaller fracturing jobs on average. Cementing and coiled tubing jobs typically generate lower revenue per job than fracturing jobs.
Fracturing represented 81% of total revenues for the quarter, down from 92% last year. Cementing accounted for 8% versus 4% in the previous year, and coiled tubing accounted for 11% versus 4% in the fourth quarter of 2007. These changes illustrate the growth in Trican's expanded service offering in Russia.
Materials and operating expenses for the quarter decreased as a percentage of revenue to 76.2% compared to 83.9% for the same period in 2007. This can be attributed to the implementation of the cost control program earlier in the year. During the quarter, pricing concessions were provided by some of our suppliers as well as a reduction in infrastructure costs with the closure of the Perm base late in the quarter. In dollar terms, general and administrative expenses increased $1.7 million due mainly to an increase in our bad debt provision and profit sharing expense.
Current Quarter versus Q3 2008
Revenue for the two quarters remained fairly consistent at $80.0 million. A slight reduction in job count was almost entirely offset by an increase in revenue per job.
Materials and operating expenses for the quarter decreased as a percentage of revenue to 76.2% compared to 78.1% in the third quarter of 2008. The decrease can be attributable to cost control measures introduced including the reduction of personnel. Fuel prices started to decrease in the later part of the quarter; this was offset by a higher fuel usage with the onset of colder weather. In dollar terms, general and administrative expenses increased $1.6 million due mainly to an increase in our bad debt provision.
UNITED STATES OPERATIONS
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Three months ended,
($ thousands, Dec. 31, % of Dec. 31, % of Sept. 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Revenue 67,631 21,781 47,640
Expenses
Materials and
operating 48,291 71.4% 16,982 78.0% 38,565 81.0%
General and
administrative 3,274 4.8% 1,677 7.7% 2,965 6.2%
--------- -------- --------
Total expenses 51,565 76.2% 18,659 85.7% 41,530 87.2%
Operating income(i) 16,066 23.8% 3,122 14.3% 6,110 12.8%
Number of jobs 605 203 458
Revenue per job 111,878 107,293 104,017
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(i) see first page of this report
Operations Review
Trican acquired Liberty Pressure Pumping LP ("Liberty") late in the first quarter of 2007, marking the Company's entry into the US pressure pumping market. Operations early in 2008 were hampered by inadequate supplies of high quality fracturing proppant. By the end of the first quarter, we overcame the proppant supply issues and have successfully regained market share that had been lost due to the sand supply shortages. As a result, a record US job count was achieved in the quarter despite a reduction in active US rig count in the Company's areas of operations. Trican has also secured a significant 2009 fracturing contract in the Haynesville Shale located in northwest Louisiana and east Texas.
Current Quarter versus Q4 2007
Revenue for the quarter increased 211% from the fourth quarter of 2007 to establish a new quarterly revenue record of $67.6 million. The increase in revenue can be attributable to a significant increase in job count combined with an increase in revenue per job. Job count was up mainly due to the resolution of the sand supply issue. Revenue per job increased primarily as a result of the strengthening US dollar relative to the Canadian dollar. Revenue per job in US dollar terms actually decreased from the fourth quarter of 2007 due to a 7% increase in discounts offered to customers, as a reduction in natural gas prices resulted in increased competition for work in our areas of operations.
Materials and operating expenses as a percentage of revenue were 71.4% in the quarter compared to 78.0% in the prior year. The decrease can be attributed to higher utilization levels increasing operational leverage that was partially offset by higher average discounts. In dollar terms, general and administrative expenses increased $1.6 million due to additional administrative costs associated with the addition of bases in Searcy, Arkansas and Woodward, Oklahoma.
Current Quarter versus Q3 2008
Revenue increased by $20.0 million, or 42% on a sequential basis. Supporting the increase in revenue was a 32% increase in job count as we continue to maintain market share that was regained late in the third quarter. Revenue per job increased as a result of the strengthening US dollar relative to the Canadian dollar. Revenue per job in US dollar terms was slightly lower as a result of a decrease in the average size of fracturing jobs performed.
Materials and operating expenses as a percentage of revenue decreased to 71.4% from 81.0% in the previous quarter due to increased operational leverage resulting from higher utilization of equipment.
CORPORATE DIVISION
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Three months ended,
($ thousands, Dec. 31, % of Dec. 31, % of Sept. 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Expenses
Materials and
operating 2,335 0.7% 1,113 0.6% 2,033 0.7%
General and
administrative 3,058 0.9% 2,216 1.1% 2,228 0.8%
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Total expenses 5,393 1.7% 3,329 1.7% 4,261 1.5%
Operating loss(i) (5,393) (3,329) (4,261)
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(i) see first page of this report
Corporate division expenses consist of salaries, stock-based compensation and office costs related to corporate employees, as well as public company costs.
Current Quarter versus Q4 2007
Corporate division expenses were up $2.1 million from the same quarter last year due to an increase in expenses relating to the corporate restructuring, higher travel costs to support geographic expansion, and an increase in profit sharing expense.
Current Quarter versus Q3 2008
Corporate Division expenses were up $1.1 million on a sequential basis. The increase can be attributable to mark to market of deferred share units, an increase in travel costs and professional fees associated with applications for patents and higher travel costs.
OTHER EXPENSES AND INCOME
Interest expense decreased to $2.3 million for the quarter from $2.8 million for the comparable prior period. This was mainly a result of a decrease to the effective average interest rate on the consolidated debt facilities during the quarter. The decrease in rates more than offset the increase in outstanding debt compared to the prior quarter.
Depreciation and amortization increased to $28.2 million for the quarter compared to $17.8 million for the same period in 2007 as a result of the continued investment in equipment and operations facilities across all regions.
Foreign exchange gains increased to $6.4 million in the quarter from $1.4 million for the comparable prior period as a result of US dollar and Russian ruble currency fluctuations relative to the Canadian dollar.
Other expense increased to $1.1 million in the fourth quarter of 2008 from $0.1 million for the same period in the prior year. This increase was largely caused by an impairment write-down of $0.9 million on intangible assets.
INCOME TAXES
Trican recorded an income tax recovery of $54.9 million in the quarter versus $3.3 million for the comparable period of 2007. The increase in income tax recovery can be attributable to $67.7 million in future income tax recoveries relating to goodwill and other asset impairment write-downs during the quarter. These recoveries were slightly offset by an increase in income taxes expense relating to higher overall earnings before one-time charges.
2008 HIGHLIGHTS
Trican's 2008 financial and operational performance reflects a strong improvement in the Company's Canadian operations that was more than offset by sand supply issues and margin contractions in the Company's US operations and inflationary pressures on the Russian operations.
The Company reports record revenues of just over $1 billion during the year, surpassing the previous record of $847 million in 2006 by over 20%. Before the impact of one-time charges and stock-based compensation, net income for the year was $73.3 million versus $124.5 million in 2007. There was a net loss of $70.4 million for the year compared to net income of $111.8 million in 2007. Diluted earnings per share fell to a loss of $0.56 versus earnings of $0.91 in 2007. Before the impact of one-time charges and stock based compensation, diluted earnings per share for 2008 was $0.58 compared to $1.01 in 2007. Funds from operations increased 27% to $167.1 million from $131.8 million in 2007.
Results from our Canadian operations were strongly influenced by the emergence of unconventional natural gas plays in western Canada and oil prospects in southern Saskatchewan.
Revenue from our Russian operations benefited from expanded operational reach, expanded service offerings, and additional operating capacity combined with strong demand. However, higher domestic inflation combined with flat contract rates have contributed to lower earnings from our Russian operations. During 2008, management undertook pricing reviews with customers and implemented cost control measures resulting in an increase in operating margins during the last half of the year relative to the first half of the year.
The Company continued its expansion into the US with the opening of two new bases in Searcy, Arkansas and Woodward, Oklahoma. The US operations overcame its proppant supply issue by the end of the first quarter of 2008 and by the fourth quarter successfully regained market share that had been lost due to sand supply shortages. This resulted in significant revenue and job count growth compared to 2007. However, an increasingly competitive environment in the US compared to last year has arisen as a result of an increase in the amount of equipment operating in our areas of operation combined with a reduction in natural gas prices. This has led to higher average discounts offered to customers, which has resulted in downward pressure on our US margins.
In accordance with accounting pronouncements, the company reviewed the carrying values of the US operations as a whole and an unrelated third party loan. The near term economic uncertainty facing the US operations has created an uncertain environment where the US operations goodwill and a portion of the unrelated third party loan are considered impaired for accounting purposes. Impairment provisions of $180.0 million relating to the goodwill and $18.5 million relating to the unrelated third party loan were recorded.
COMPARATIVE ANNUAL INCOME STATEMENTS
($ thousands, unaudited)
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Year
Over-
Years ended % of % of Year %
December 31, 2008 Revenue 2007 Revenue Change Change
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Revenue 1,016,083 100.0% 836,373 100.0% 179,710 21%
Expenses
Materials and
operating 780,006 76.8% 602,919 72.1% 177,087 29%
General and
administrative 54,285 5.3% 38,363 4.6% 15,922 42%
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Operating income(i) 181,792 17.9% 195,091 23.3% (13,299) -7%
Goodwill impairment 179,771 17.7% - - 179,771 100%
Other asset
impairment 18,454 1.8% - - 18,454 100%
Interest expense 13,782 1.4% 8,596 1.0% 5,186 60%
Depreciation and
amortization 93,394 9.2% 62,707 7.5% 30,687 49%
Foreign exchange
gain (5,971) -0.6% (20,512) -2.5% 14,541 -71%
Other income (2,997) -0.3% (1,356) -0.2% (1,641) 121%
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(Loss)/Income before
income taxes and
non-controlling
interest (114,641) -11.3% 145,656 17.4% (260,297) -179%
Provision for income
taxes (44,267) -4.4% 31,183 3.7% (75,450) -242%
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(Loss)/income before
non-controlling
interest (70,374) -6.9% 114,473 13.7% (184,847) -161%
Non-controlling
interest 24 0.0% 2,656 0.3% (2,632) -99%
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Net (loss) / Income (70,398) -6.9% 111,817 13.4% (182,215) -163%
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(i) see first page of this report
CANADIAN OPERATIONS
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Year ended
December 31, 2008, % of % of Y-Over-Y
($ thousands unaudited) 2008 Revenue 2007 Revenue Change
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Revenue 554,554 474,111 17%
Expenses
Materials and
operating 404,868 73.0% 339,400 71.6% 19%
General and
administrative 22,452 4.0% 18,974 4.0% 18%
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Total expenses 427,320 77.1% 358,374 75.6% 19%
Operating income(i) 127,234 22.9% 115,737 24.4% 10%
Number of jobs 23,621 22,768 4%
Revenue per job 23,625 21,074 12%
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(i) see first page of this report
Revenue from Canadian operations increased 17% from the previous year to $554.6 million. The growth in revenues can be mainly attributed to a 12% increase in revenue per job as a result of larger fracturing jobs in the unconventional oil and gas plays within western Canada and an increase in the proportion of fracturing jobs. These were partially offset by an increase in higher average discounts provided to customers.
Materials and operating expenses increased as a percentage of revenue to 73.0% from 71.6% for the comparable period in 2007 as a result of higher fuel costs and overall margin contraction due to increased price competition. General and administrative costs increased $3.5 million from the prior year as a result of higher office costs and an increase in the bad debt provision.
RUSSIAN OPERATIONS
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Year ended
December 31, 2008, % of % of Y-Over-Y
($ thousands unaudited) 2008 Revenue 2007 Revenue Change
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Revenue 295,703 256,628 15%
Expenses
Materials and operating 240,988 81.5% 199,658 77.8% 21%
General and administrative 8,677 2.9% 5,453 2.1% 59%
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Total expenses 249,665 84.4% 205,111 79.9% 22%
Operating income(i) 46,038 15.6% 51,517 20.1% -11%
Number of jobs 2,977 2,046 46%
Revenue per job 99,520 126,467 -21%
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(i) see first page of this report
Revenue from Russian operations increased by 15% over the prior year to $295.7 million due to a 46% increase in job count partially offset by a 21% decrease in revenue per job. Job count has increased due to expanded equipment capacity in the fracturing and cementing service lines as well as the addition of coiled tubing services. The decrease in revenue per job relative to last year was due to flat contract rates, smaller average fracturing job sizes performed during the year, and the growth in the number of lower revenue per job cementing and coiled tubing jobs.
Materials and operating expenses increased as a percentage of revenue from 77.8% to 81.5% due to margin contraction caused by flat contract rates combined with inflationary pressures on operating expenses, most notably fuel and personnel costs. In dollar terms, general and administrative expenses increased $3.2 million due primarily to increased personnel costs and an increase in our bad debt provision.
UNITED STATES OPERATIONS
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Year ended
December 31, 2008, % of % of Y-Over-Y
($ thousands unaudited) 2008 Revenue 2007 Revenue Change
----------------------------------------------------------------------------
Revenue 165,826 105,634 57%
Expenses
Materials and operating 126,438 76.2% 59,408 56.2% 113%
General and administrative 11,009 6.6% 4,836 4.6% 128%
--------- --------
Total expenses 137,447 82.9% 64,244 60.8% 114%
Operating income(i) 28,379 17.1% 41,390 39.2% -31%
Number of jobs 1,648 794 108%
Revenue per job 100,792 133,040 -24%
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(i) see first page of this report
US revenue increased by 57% to $165.8 million versus the prior year due to a 108% increase in job count partially offset by a 24% decrease in revenue per job. Job count increased due to resolution of the sand supply issue, greater equipment capacity and a full twelve months of operations in 2008. The majority of the reduction in revenue per job can be attributed to an increase in discounts offered to customers.
Materials and operating expenses as a percentage of revenue were 76.2% in the quarter compared to 56.2% in the prior year. The significant increase can be attributed to the impact of the sand supply disruption on margins during the first three quarters of the year, margin contraction from increased discounts, and higher fuel and higher sand transportation and storage costs. The increase in general and administrative expenses can be attributed mainly to administrative costs to support additional bases in Searcy, Arkansas and Woodward, Oklahoma.
CORPORATE DIVISION
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Year ended
December 31, 2008, % of % of Y-Over-Y
($ thousands unaudited) 2008 Revenue 2007 Revenue Change
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Expenses
Materials and operating 7,712 0.8% 4,453 0.5% 73%
General and administrative 12,147 1.2% 9,100 1.1% 33%
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Total expenses 19,859 2.0% 13,553 1.6% 47%
Operating loss(i) (19,859) (13,553) 47%
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(i) see first page of this report
Corporate Division expenses were up $6.3 million compared to last year due an increase in expenses relating to the corporate restructuring and higher travel costs to support geographic expansion that was partially offset by a recovery on the valuation of deferred share units.
OTHER EXPENSES AND INCOME
Interest expense increased to $13.8 million for the year from $8.6 million for the comparable prior period as a result of higher average debt balances.
Depreciation and amortization increased to $93.4 million for the year relative to $62.7 million for the same period in 2007 as a result of investment in equipment and operations facilities across all regions.
Foreign exchange gains were $6.0 million for 2008. The strengthening of the US dollar relative to the Canadian dollar during 2008 resulted in a foreign exchange loss on our US dollar net monetary liabilities. These losses were more than offset by gains on intercompany advances.
Other income increased $1.6 million as a result of interest on a loan issued to an unrelated third party and a reduction in the value of the share component of the deferred consideration owing to former owners of CBM Solutions. These increases were partially offset by the impairment write-down on intangible assets.
INCOME TAXES
Trican recorded an income tax recovery of $44.3 million in the year compared to an expense of $31.2 million for the comparable period of 2007. The Company's effective tax rate for 2008 was a recovery of 38.6% versus an expense of 21.4% for 2007. The change in the Company's effective tax rate is primarily attributable to the impairment write-downs for goodwill and other assets in 2008. Excluding the impairment write-downs, the 2008 effective tax rate would have been 27.8%. The increase over 2007 can be attributable to non-taxable exchange gains arising from the translation of foreign subsidiaries and future tax rate reductions recorded in 2007.
OTHER COMPREHENSIVE INCOME
The consolidated statement of other comprehensive income for the year ended December 31, 2008 includes $70.7 million in unrealized gains on translating the financial statements of our self-sustaining foreign operations. The change related to translating the net assets of our US and Russian operations using the current rate method, given that the subsidiaries are considered self-sustaining for Canadian GAAP purposes. During 2008, the Canadian dollar weakened 19% and almost 4% respectively against the US dollar and the Russian ruble, increasing the value of our net asset position in these subsidiaries in Canadian dollar terms.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Funds provided by operations increased 27% to $167.2 million from the 2007 total of $131.8 million. Lower net income was more than offset by the goodwill and loan impairment provisions, an increase in depreciation expense, a lower future income tax recovery and unrealized foreign exchange gains in comparison to 2007. At December 31, 2008 the Company had working capital of $241.9 million which was an increase of $60.2 million over the 2007 year end level of $181.7 million. Significant increases in activity levels during the 2008 fourth quarter resulted in higher accounts receivable balances which was partially offset by an increase in accounts payable balances.
Investing Activities
During the first quarter of 2008, the Company paid $3.4 million to the existing shareholder of R-Can Services Limited (R-Can) to increase its ownership interest in R-Can by 0.6% to 98.8%. R-Can holds the investment in the Company's Russian operations.
During the second and third quarters of 2008, the Company paid $19.1 million to increase its ownership interest in Liberty from 93.2% to 100%. These acquisitions were paid in cash based in accordance with pre-existing agreements. Capital expenditures for the year totaled $124.4 million compared with $160.2 million for the same period in 2007. This investment was directed to equipment and operating facilities in Canada, the United States, and Russia.
At the end of 2008, the Company had a number of ongoing capital projects and estimates that $12.4 million of additional investment will be required to complete them.
Financing Activities
During the first quarter, the Company expanded the syndicated $120 million (or US dollar equivalent) three year extendible revolving acquisition and capital expenditure Term Credit Facility to $220 million (or US dollar equivalent) until December 1, 2008, at which time the facility was reduced to $120 million. Other than the facility amount, terms of this facility were unchanged.
On November 17, 2008, Trican's US subsidiary entered into a US$30 million demand revolving facility with a large international bank. This facility is unsecured, bears interest at Bank Prime plus 0.25% or LIBOR plus 1.50%, has been guaranteed by the Company and is subject to financial and non-financial covenants that are typical of this type of arrangement. At December 31, 2008, this facility was fully drawn.
On November 20, 2008, Trican's Russian subsidiary entered into a US$20 million demand revolving facility with a large international bank. This facility is unsecured, bears interest at LIBOR plus a premium, as determined by the bank, plus 2.75% and has been guaranteed by the Company. At December 31, 2008, this facility was fully drawn.
On December 17, 2008, the Company's $30 million (or US dollar equivalent) demand revolving facility with a Canadian chartered bank was increased to $35 million and bears interest at Bank Prime plus 0.5% to 1.25% or at LIBOR plus 1.5% to 2.25%, dependent on certain financial ratios maintained by the Company. The facility is unsecured, due on demand and is subject to financial and non-financial covenants that are typical of this type of arrangement. At December 31, 2008, nil was drawn on this facility (2007 - $15.6 million).
As at March 4, 2009, Trican had 125,562,767 common shares and 8,569,865 employee stock options outstanding.
BUSINESS RISKS
A complete discussion of business risks faced by the Company may be found under the "Management Discussion and Analysis" section in Trican's 2007 Annual Report and when available the 2008 "Management Discussion and Analysis".
OUTLOOK
The impact of the financial crisis and worldwide economic recession has reduced demand for oil and natural gas, resulting in a considerable reduction in current and forecast oil and gas prices. The fall in commodity prices has reduced our customers' 2009 cash flow expectations and impacted their ability to access debt and equity financing. We therefore expect a sharp reduction in demand for our services in 2009 across all of our operating regions.
We anticipate the reduction in demand for our services to increase industry competitiveness and put downward pressure on the job count and pricing in each of our geographic regions. As a result, we expect substantial downward pressure on our operating margins during 2009. A significant portion of the cost structure in each geographic region is variable in nature and will naturally reduce with a decrease in job count. Even so, we anticipate that pricing declines and fixed costs will negatively impact each geographic region's operating income as a percentage of revenue.
We have closely monitored the financial crisis and economic recession and its impact on our operations and financial position. Our management team has proactively reacted to its impact by implementing cost cutting measures throughout our organization and significantly reducing our capital expenditure program. We will continue to monitor the impact of the economic recession on our operations and we are committed to appropriately adjusting our cost structure to the level of work expected in the near term while preserving our ability to capitalize on long term growth opportunities. We expect Trican's strong and experienced management team, operational and technical expertise and strong balance sheet will result in successfully managing through the downturn by maintaining our uncompromising focus on effectively servicing our customers' current and future needs.
NON-GAAP DISCLOSURE
Adjusted net income does not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers. The following is a reconciliation of adjusted net income, as used in this report, to net income, being the most directly comparable measure calculated in accordance with GAAP. The reconciling items have been presented net of tax.
----------------------------------------------------------------------------
Three months ended Year ended
----------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2008 2007 2008 2007
----------------------------------------------------------------------------
Adjusted net income 39,639 21,436 73,278 124,547
Deduct:
Goodwill impairment 114,658 - 114,658 -
Other asset impairment 16,063 - 16,063 -
Stock-based compensation expense 3,530 3,282 12,269 12,730
Intangible asset impairment 686 - 686 -
----------------------------------------------------------------------------
Net (loss)/income (GAAP financial
measure) (95,298) 18,154 (70,398) 111,817
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other non-GAAP measures include operating income and funds provided by operations. A calculation of operating income is shown in the consolidated statements of operations and funds provided by operations is shown in the consolidated cash flow statements.
FORWARD-LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements within the meaning of applicable securities legislation. These forward-looking statements include, among others, the Company's prospects, expected revenues, expenses, profits, expected developments and strategies for its operations, and other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results of operations or performance. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "achieve", "achievable," "believe," "estimate," "expect," "intend", "plan", "planned", and other similar terms and phrases. Forward-looking statements are based on current expectations, estimates, projections and assumptions that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks and uncertainties include: fluctuating prices for crude oil and natural gas; changes in drilling activity; general global economic, political and business conditions; weather conditions; regulatory changes; and availability of products, qualified personnel, manufacturing capacity and raw materials. If any of these uncertainties materialize, or if assumptions are incorrect, actual results may vary materially from those expected.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of dollars; unaudited) As at
December 31, 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term deposits $ 56,281 $ 23,370
Accounts receivable 231,636 138,226
Income taxes recoverable 12,599 5,651
Inventory (note 6) 107,831 93,209
Prepaid expenses 20,062 15,576
----------------------------------------------------------------------------
428,409 276,032
Property and equipment (note 7) 632,041 555,104
Intangible assets (note 8) 38,543 40,659
Future income tax assets (note 17) 86,206 1,070
Other assets (note 9) 12,185 8,782
Goodwill (note 10) 35,556 167,417
----------------------------------------------------------------------------
$ 1,232,940 $ 1,049,064
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank loans (note 11) $ 61,230 $ 15,584
Accounts payable and accrued liabilities 117,450 70,529
Deferred consideration (note 12) 1,572 2,146
Dividend payable 6,278 6,123
----------------------------------------------------------------------------
186,530 94,382
Long-term debt (note 13) 242,460 188,810
Future income tax liabilities (note 17) 82,036 67,531
Deferred consideration (note 12) 1,572 4,292
Non-controlling interest (note 5) 801 10,380
Shareholders' equity
Share capital (note 14) 246,357 196,165
Contributed surplus 18,584 20,675
Retained earnings 463,276 546,211
Accumulated other comprehensive income (8,676) (79,382)
----------------------------------------------------------------------------
719,541 683,669
----------------------------------------------------------------------------
Contractual obligations and contingencies (notes
20 and 22) $ 1,232,940 $ 1,049,064
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except per share amounts,
unaudited) Years ended December 31, 2008 2007
----------------------------------------------------------------------------
Revenue $ 1,016,083 $ 836,373
Expenses
Materials and operating 780,006 602,919
General and administrative 54,285 38,363
----------------------------------------------------------------------------
Operating income 181,792 195,091
Goodwill impairment 179,771 -
Other asset impairment 18,454 -
Interest expense on long-term debt and bank loans 13,782 8,596
Depreciation and amortization 93,394 62,707
Foreign exchange gain (5,971) (20,512)
Other income (2,997) (1,356)
----------------------------------------------------------------------------
(Loss)/income before income taxes and
non-controlling interest (114,641) 145,656
Provision for current income taxes (note 17) 24,369 66,985
Provision for future income taxes (note 17) (68,636) (35,802)
----------------------------------------------------------------------------
(Loss)/income before non-controlling interest (70,374) 114,473
Non-controlling interest 24 2,656
----------------------------------------------------------------------------
Net (loss)/income $ (70,398) $ 111,817
----------------------------------------------------------------------------
Per share amount (note 15)
Basic $ (0.56) $ 0.93
Diluted $ (0.56) $ 0.91
----------------------------------------------------------------------------
Dividend per share $ 0.10 $ 0.10
----------------------------------------------------------------------------
Weighted average shares outstanding - basic (note 15) 124,726 120,724
Weighted average shares outstanding - diluted (note 15) 124,726 123,493
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Stated in thousands of dollars, unaudited) Years
ended December 31, 2008 2007
----------------------------------------------------------------------------
Net (loss)/income $ (70,398) $ 111,817
Other comprehensive income
Unrealized gains/(losses) on translating financial
statements of self-sustaining foreign operations 70,706 (72,245)
----------------------------------------------------------------------------
Other comprehensive income $ 308 $ 39,572
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER
COMPREHENSIVE INCOME
(Stated in thousands of dollars, unaudited) Years
ended December 31, 2008 2007
----------------------------------------------------------------------------
Retained earnings, beginning of year $ 546,211 $ 446,606
Dividend (12,537) (12,212)
Net (loss)/income (70,398) 111,817
----------------------------------------------------------------------------
Retained earnings, end of year $ 463,276 $ 546,211
----------------------------------------------------------------------------
Accumulated other comprehensive income, beginning
of year $ (79,382) $ (7,137)
Unrealized gains/(losses) on translating financial
statements of self-sustaining foreign operations 70,706 (72,245)
----------------------------------------------------------------------------
Accumulated other comprehensive income, end of
year $ (8,676) $ (79,382)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED CASH FLOW STATEMENTS
(Stated in thousands of dollars, unaudited) Years
ended December 31, 2008 2007
----------------------------------------------------------------------------
Cash Provided By (Used In):
Operations
Net (loss)/income $ (70,398) $ 111,817
Charges to income not involving cash:
Depreciation and amortization 93,394 62,707
Future income tax provision (68,636) (35,802)
Non-controlling interest 24 2,656
Stock-based compensation 12,269 12,730
Loss / (gain) on disposal of property and equipment 29 (19)
Gain on revaluation of deferred consideration (1,375) -
Realized foreign exchange loss/(gain) from financing
activities 6,482 (9,270)
Unrealized foreign exchange gain (3,767) (13,064)
Writedown of goodwill, other assets and intangible
assets 199,152 -
----------------------------------------------------------------------------
Funds provided by operations 167,174 131,755
Net change in non-cash working capital from
operations (67,995) (927)
----------------------------------------------------------------------------
Net cash provided by operating activities 99,179 130,828
----------------------------------------------------------------------------
Investing
Purchase of property and equipment (124,383) (160,178)
Proceeds from the sale of property and equipment 221 238
Purchase of other assets (1,319) -
Issuance of loan to unrelated third party (15,727) (8,782)
Business acquisitions, net of cash acquired (23,636) (256,079)
Net change in non-cash working capital from the
purchase of property and equipment 1,071 (2,172)
----------------------------------------------------------------------------
(163,773) (426,973)
Financing
Net proceeds from issuance of share capital 34,778 20,837
Net issuance of bank loans 45,687 15,584
Issuance of long-term debt 130,000 295,610
Repayment of long-term debt (100,000) (93,397)
Distribution of equity to non-controlling interest
holders (1,046) (427)
Dividend paid (12,382) (11,849)
----------------------------------------------------------------------------
97,037 226,358
Effect of exchange rate changes on cash 468 (1,553)
----------------------------------------------------------------------------
Increase / (decrease) in cash and short-term
deposits 32,911 (71,340)
Cash and short-term deposits, beginning of year 23,370 94,710
----------------------------------------------------------------------------
Cash and short-term deposits, end of year $ 56,281 $ 23,370
----------------------------------------------------------------------------
Supplemental information
Income taxes paid 31,317 108,659
Interest paid 13,746 8,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Notes to Consolidated Financial Statements
For the years ended December 31, 2008 and 2007
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of business
Trican Well Service Ltd. (the "Company") is an oilfield services company incorporated under the laws of the province of Alberta. The Company provides a comprehensive array of specialized products, equipment, services and technology for use in the drilling, completion, stimulation and reworking of oil and gas wells in Canada, Russia, Kazakhstan, the US, and Algeria.
Basis of presentation
The financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles. Management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates.
NOTE 2 - CHANGES IN ACCOUNTING POLICIES
Inventories
Effective January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") section 3031, "Inventories," which replaced CICA section 3030 of the same name. This section provides new guidance on the recognition, measurement, and disclosure of inventories which include: the elimination of the LIFO method of accounting for inventory; the requirement to measure inventories at the lower of cost and net realizable value; the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories; and the inclusion of spare parts inventory not consumed as part of the regular maintenance program as property and equipment. In addition, disclosure requirements have been enhanced. Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are now required to be disclosed. The revised guidance requires the Company to determine the proportion of the spare parts inventories that are not consumed as part of regular maintenance and include as property and equipment.
Financial Instruments
Effective January 1, 2008, the Company adopted CICA section 3862, "Financial Instruments -Disclosures" and CICA section 3863, "Financial Instruments - Presentation," which replaced CICA section 3861, "Financial Instruments - Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. The presentation requirements under section 3863 are relatively unchanged from section 3861. Refer to Note 18, "Financial Instruments - Disclosures" for the additional disclosures under section 3862.
Capital Management Disclosures
Effective January 1, 2008, the Company adopted CICA section 1535, "Capital Disclosures." This new guidance requires disclosure about the Company's objectives, policies and processes for managing capital. These disclosures include a description of what the Company manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to Note 19, "Capital Management Disclosures."
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements:
Consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which, except one (2007: two), are wholly owned. All inter-company balances and transactions have been eliminated on consolidation.
Cash and short-term deposits
The Company's short-term investments with original maturities of three months or less are considered to be cash equivalents and are recorded at cost, which approximates fair market value.
Inventory
Inventory is carried at the lower of cost, determined under the first-in, first-out method, and net realizable value.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Major betterments are capitalized. Repairs and maintenance expenditures which do not extend the useful life of the property and equipment are expensed.
Depreciation is calculated using the straight-line method over the estimated useful life of the asset as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Buildings and improvements 20 years Equipment 3 to 10 years Furniture and fixtures 2 to 10 years ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Management bases the estimate of the useful life and salvage value of property and equipment on expected utilization, technological change and effectiveness of maintenance programs. Although management believes the estimated useful lives of the Company's property and equipment are reasonable, it is possible that changes in estimates could occur which may affect the expected useful lives and salvage values of the property and equipment.
Impairment of Long-Lived Assets
Long-lived assets include property and equipment and intangible assets. Property and equipment is tested for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable. Intangible assets are tested for impairment annually, or more frequently as circumstances require. An impairment loss is recognized when the carrying amount of the assets exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. Estimates of undiscounted future net cash flows are calculated using estimated future job count, sales prices, operating expenditures and other costs. These estimates are subject to risk and uncertainties, and it is possible that changes in estimates could occur which may impact the expected recoverability of the Company's assets.
To test for and measure impairment, assets are grouped at the lowest level for which identifiable cash flows are largely independent. The four lowest asset groupings for which identifiable cash flows are largely independent are Canadian Operations, Russian Operations, US Operations and the Corporate division.
Goodwill
Goodwill represents the excess of purchase price for business acquisitions over the fair value of the acquired net assets. Goodwill is allocated as of the date of the business combination to the Company's reporting units that are expected to benefit from the synergies of the business combination. Goodwill is not amortized, but is tested for impairment at least annually. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and performance of the second step of the impairment test is unnecessary. The second step compares the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of the impairment loss, if any.
Intangible Assets
Non-compete agreements relate to the Company's acquisitions and are recorded at estimated cost and amortized on a straight line basis over 8 years.
Customer relationships relate to the Company's acquisitions and are recorded at estimated cost and amortized on a straight line basis over 5 years.
The "CBM Process" relates to an acquisition by the Company and is recorded at estimated cost and amortized on a straight line basis over 10 years.
Revenue recognition
The Company's revenue comprises services and other revenue and is generally sold based on fixed or determinable priced purchase orders or contracts with the customer. Service and other revenue is recognized when the services are provided and collectability is reasonably assured. Customer contract terms do not include provisions for significant post-service delivery obligations.
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, the Company records future income taxes for the effect of any difference between the accounting and income tax basis of an asset or liability, using the substantively enacted tax rates. The computation of the provision for income taxes involves tax interpretations, regulations and legislation that are continually changing. There are tax matters that have not yet been confirmed by taxation authorities; however, management believes the provision for income taxes is reasonable.
Foreign currency translation
For foreign entities whose functional currency is the Canadian dollar, the Company translates monetary assets and liabilities at year-end exchange rates, and non-monetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Gains or losses from changes in exchange rates are recognized in consolidated income in the year of occurrence.
For foreign entities whose functional currency is not the Canadian dollar, the Company translates assets and liabilities at year-end rates and income and expense accounts at average exchange rates. Adjustments resulting from these translations are reflected in the consolidated statements of other comprehensive income as unrealized gains or losses on translating financial statements of self-sustaining foreign operations.
Transactions of Canadian entities in foreign currencies are translated at rates in effect at the time of the transaction. Foreign currency monetary assets and liabilities are translated at current rates. Gains or losses from changes in exchange rates are recognized in consolidated income in the year of occurrence. Advances made to foreign subsidiaries for which settlement is not planned or anticipated in the foreseeable future are considered part of the net investment in the foreign subsidiary. Accordingly, gains and losses from these advances are reported in the consolidated statements of other comprehensive income as unrealized gains or losses on translating financial statements of self-sustaining foreign operations.
Stock-based compensation plans
The Company has a stock option plan which is described in note 16. The Company accounts for stock options using the Black-Scholes option pricing model, whereby the fair value of stock options are determined on their grant date and recorded as compensation expense over the period that the stock options vest, with a corresponding increase to contributed surplus. When stock options are exercised, the proceeds together with the amount recorded in contributed surplus are recorded in share capital.
The Company has a deferred share unit plan which is described in note 16. The Company accrues a liability equal to the closing price of the Company's common shares on the balance sheet date for each unit issued under the plan.
Earnings per share
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Under the treasury stock method, diluted earnings per share is calculated based on the weighted average number of shares issued and outstanding during the year, adjusted by the total of the additional common shares that would have been issued assuming exercise of all stock options with exercise prices at or below the average market price for the year, offset by the reduction in common shares that would be purchased with the exercise proceeds.
Comparative figures
Comparative figures have been restated to conform to current year's presentation.
NOTE 4 - ACCOUNTING STANDARDS PENDING ADOPTION
International Financial Reporting Standards (IFRS)
In February 2008, the Canadian Accounting Standards Board confirmed that effective January 1, 2011, all publicly accountable enterprises will be required to report under IFRS as issued by the International Accounting Standards Board (IASB). On January 1, 2011, these standards will apply to the Company. As a result of this announcement, the Company has started an IFRS conversion project and is evaluating the impact of the initial application of these standards on the consolidated financial statements.
NOTE 5 - ACQUISITIONS
A. In March 2007, the Company acquired 93.2% of Liberty Pressure Pumping LP's (Liberty) assets, a provider of pressure pumping services in Texas. Headquartered in Denton Texas, Liberty provides stimulation services used in the development and completion of oil and gas wells. On the date of purchase, Liberty management retained a 6.8% interest. The acquisition of Liberty was recorded using the purchase method with results of operations of Liberty included in the consolidated financial statements as of March 9, 2007.
The purchase price equation was as follows:
Cost of Acquisition (Stated in thousands):
-------------------------------------------
Cash $ 233,908
Common shares issued out of treasury 82,973(a)
Transaction costs 3,854
----------------------------------------------------------------------------
$ 320,735
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Allocated (Stated in thousands):
---------------------------------
Goodwill $ 161,024(b)
Property and equipment 100,488
Other intangibles 34,604
Accounts receivable 30,186
Cash 7,186
Prepaid expenses, inventory and other 4,809
Accounts payable and accrued liabilities (8,435)
Non-controlling interest (9,127)
----------------------------------------------------------------------------
$ 320,735
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) 4,008,864 shares at a price of $20.70 per share which was based on the
weighted average share price for the two days preceding and two days
following the announcement date of February 2, 2007.
(b) Goodwill has been attributed to the US Operations reporting segment
and is considered to be deductible for tax purposes.
During the second quarter of 2008, the Company, through a wholly owned US subsidiary, increased its ownership interest in Liberty by 1.8% to 95.0%. The Company paid $5.9 million for this acquisition, increasing goodwill by $3.4 million and reducing non-controlling interest by $2.5 million.
During the third quarter of 2008, the Company, through a wholly owned US subsidiary, acquired the remaining 5% ownership interest in Liberty. The Company paid $13.2 million for this acquisition, increasing goodwill by $7.2 million and reducing non-controlling interest by $6.0 million.
B. In March 2007, the Company acquired all of the shares of CBM Solutions Ltd. (CBM Solutions) and increased its ownership interest in R-Can Services Limited (R-Can) by 1.2% to 98.2%.
- Headquartered in Calgary Alberta, CBM Solutions specializes in the provision of geological and engineering services for unconventional gas wells, including gas content analysis, reservoir characterization and consulting services for coalbed methane and shale gas wells. The acquisition of CBM Solutions in March 2007 was recorded using the purchase method with results of operations of CBM Solutions included in the consolidated financial statements from the effective date of acquisition. In addition to the amounts disclosed below, contingent consideration may be paid for each calendar year ended 2009, 2010, and 2011 based upon financial results for that year.
- Pursuant to an agreement entered into in June 2004 with the remaining shareholder of R-Can, the Company increased its ownership percentage to 98.2% through the purchase of 1,208 common shares.
These transactions were recorded using the purchase method and the purchase price equation of the aforementioned transactions is as follows:
Cost of Acquisition (Stated in thousands):
-------------------------------------------
Cash and transaction costs $ 25,503
Deferred consideration 6,438(a)
----------------------------------------------------------------------------
$ 31,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Allocated (Stated in thousands):
---------------------------------
Goodwill $ 19,998(b)
Other intangibles 15,400
Equipment 242
Future income tax liability (4,273)
Non-controlling interest 574
----------------------------------------------------------------------------
$ 31,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) See Note 12
(b) $15.1 of goodwill has been attributed to the Canadian Operations
reporting segment with the remaining $4.9 million attributed to Russian
Operations and is not considered deductible for tax purposes.
During the first quarter of 2008 and pursuant to an agreement amended in March 2007, the Company increased its ownership interest in R-Can by 0.6% to 98.8%. The Company paid $3.4 million for this acquisition, increasing goodwill by $3.0 million and reducing non-controlling interest by $0.4 million.
NOTE 6 - INVENTORY
(Stated in thousands) 2008 2007
----------------------------------------------------------------------------
Product inventory
Chemicals and consumables $ 55,698 $ 44,709
Coiled tubing 14,464 11,882
Parts 37,669 36,618
----------------------------------------------------------------------------
$ 107,831 $ 93,209
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTE 7 - PROPERTY AND EQUIPMENT
(stated in thousands) 2008 2007
----------------------------------------------------------------------------
Property and Equipment:
Land $ 16,728 $ 15,593
Buildings and improvements 51,888 48,109
Equipment 789,307 639,937
Furniture and fixtures 23,357 20,684
----------------------------------------------------------------------------
881,280 724,323
Accumulated Depreciation:
Buildings and improvements 9,345 6,098
Equipment 226,393 152,677
Furniture and fixtures 13,501 10,444
----------------------------------------------------------------------------
249,239 169,219
----------------------------------------------------------------------------
$ 632,041 $ 555,104
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTE 8 - INTANGIBLE ASSETS
(Stated in thousands) 2008 2007
----------------------------------------------------------------------------
Non-compete agreements (accumulated amortization
2008 - $6,080, 2007 - $2,235) $ 21,709 $ 20,616
Customer relationships (accumulated amortization
2008 - $5,288, 2007 - $2,025) 9,821 11,074
CBM Process (accumulated amortization 2008 -
$1,486, 2007 - $637) 7,013 7,862
License (accumulated amortization 2008 - $nil,
2007 - $1,247) - 1,107
----------------------------------------------------------------------------
$ 38,543 $ 40,659
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the year ended December 31, 2008, the Company wrote off the net book value of the license, which was reported under the Canadian operating division. This write-off was based on assessment made by management, which took into account the historical and future revenue streams generated from the license. The amount of the write-off was $0.9 million and has been included in other income in the consolidated statements of operations.
NOTE 9 - OTHER ASSETS
Included in other assets is a US$24.1 million secured, interest bearing first mortgage real estate loan to an unrelated third party located in the US (2007 - US$8.8 million). During the year ended December 31, 2008, an impairment provision of US$15.1 million was recorded against the loan and the carrying value was reduced to US$9.0 million. The conditions that led to this impairment were weakened industry activity largely attributable to low North American natural gas prices, excess equipment capacity in the US and a weakening US economy. These changes in economic conditions indicated that there had been deterioration in the credit quality of the unrelated third party and the fair value of the loan security.
NOTE 10 - GOODWILL (Stated in thousands) 2008 2007 ---------------------------------------------------------------------------- Balance at the beginning of the year $ 167,417 $ 13,983 Acquisition of Liberty 10,613 161,024 Acquisition of CBM Solutions 301 15,119 Acquisition of R-Can 2,988 4,879 Impact of foreign currency rate changes on goodwill 34,008 (27,588) Goodwill impairment (179,771) - ---------------------------------------------------------------------------- Balance at the end of the year $ 35,556 $ 167,417 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See note 5 for additional information on the acquisitions made during 2007 and 2008.
As at December 31, 2008, the Company recorded a goodwill impairment of $179.8 million relating to the acquisition of Liberty. The conditions that precipitated the goodwill impairment were weakened industry activity largely attributable to low North American natural gas prices, excess equipment capacity in the US and a weakening US economy. The weak industry activity environment is expected to continue at least into the near term and has resulted in a deterioration of the expected near term results within the US operating division. The culmination of these conditions has decreased the market value of the Company's US operations and as a result, management determined that a goodwill impairment existed at December 31, 2008.
NOTE 11 - BANK LOANS
On November 17, 2008, Trican's US subsidiary entered into a US$30 million demand revolving facility with a large international bank. This facility is unsecured, bears interest at Bank Prime plus 0.25% or LIBOR plus 1.50%, has been guaranteed by the Company and is subject to financial and non-financial covenants that are typical of this type of arrangement. At December 31, 2008, this facility was fully drawn.
On November 20, 2008, Trican's Russian subsidiary entered into a US$20 million demand revolving facility with a large international bank. This facility is unsecured, bears interest at LIBOR plus a premium, as determined by the bank, plus 2.75% and has been guaranteed by the Company. At December 31, 2008, this facility was fully drawn.
On December 17, 2008, the Company's $30 million (or US dollar equivalent) demand revolving facility with a Canadian chartered bank was increased to $35 million and bears interest at Bank Prime plus 0.5% to 1.25% or at LIBOR plus 1.5% to 2.25%, dependent on certain financial ratios maintained by the Company. The facility is unsecured, due on demand and is subject to financial and non-financial covenants that are typical of this type of arrangement. At December 31, 2008, nil was drawn on this facility (2007 - $15.6 million).
NOTE 12 - DEFFERED CONSIDERATION
(Stated in thousands) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash $ 2,333 $ 3,500
Common Shares 811 2,938
----------------------------------------------------------------------------
$ 3,144 $ 6,438
----------------------------------------------------------------------------
Amount classified as current $ 1,572 $ 2,146
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred consideration on the CBM Solutions acquisition (note 5) consisted of $3.5 million in cash and 152,772 common shares of the Company due on the first, second and third anniversary of the closing date, which was in March 2007. During 2008, $1.2 million of cash was paid and 50,852 shares were issued as part of the deferred consideration.
NOTE 13 - LONG-TERM DEBT
(Stated in thousands) 2008 2007
----------------------------------------------------------------------------
Notes payable $ 122,460 $ 98,810
Equipment and acquisition loan 120,000 90,000
----------------------------------------------------------------------------
$ 242,460 $ 188,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes Payable
On June 21, 2007, the Company entered into an agreement with institutional investors in the US providing for the issuance, by way of private placement of US $100 million of Senior Unsecured Notes (the "Notes") in two tranches:
- US $25 Million Series A Senior Notes maturing June 22, 2012, bearing interest at a fixed rate of 6.02% payable semi-annually on June 22 and December 22; and
- US $75 Million Series B Senior Notes maturing June 22, 2014, bearing interest at a fixed rate of 6.10% payable semi-annually on June 22 and December 22.
Proceeds from the Notes were used to fully repay the US $90 million Bridge Credit Facility entered into on March 6, 2007 to finance the acquisition of Liberty, with the remainder utilized for general corporate purposes. The Notes require the Company to maintain certain financial and non-financial covenants that are typical for this type of arrangement.
Equipment and Acquisition Loan
On March 9, 2007, the Company entered into a $70 million (or US dollar equivalent) three year extendible revolving acquisition and capital expenditure Term Credit Facility (the "facility") with a Canadian chartered bank. On September 13, 2007, the facility was syndicated with one Canadian chartered bank and one large international bank and expanded from $70 million to $120 million (or US dollar equivalent). On February 5, 2008, the term of the facility was extended to March 6, 2011. The facility is reviewed annually by the lender, should it not be extended, repayment will be made at the end of the term. On February 15, 2008, the Company expanded the facility to $220 million (or US dollar equivalent) until December 1, 2008, at which time the facility was reduced to $120 million.
The facility is unsecured and bears interest at the bank's prime rate, US base rate, Bankers' Acceptance rate or at LIBOR plus 0 to 125 basis points, dependent on certain financial ratios of the Company. The facility is subject to financial and non-financial covenants that are typical for this type of arrangement.
NOTE 14 - SHARE CAPITAL Authorized: The Company is authorized to issue an unlimited number of common shares and preferred shares, issuable in series. Issued and Outstanding - Common Shares: ---------------------------------------------------------------------------- (stated in thousands, except share amounts) Number of Shares Amount ---------------------------------------------------------------------------- Balance, December 31, 2006 115,197,674 $ 84,661 Exercise of stock options 3,243,844 20,938 Reclassification from contributed surplus on exercise of options 7,694 Issuance on the acquisition of Liberty, net of share issuance costs 4,008,864 82,872 ---------------------------------------------------------------------------- Balance, December 31, 2007 122,450,382 196,165 Exercise of stock options 3,061,533 34,778 Reclassification from contributed surplus on exercise of options 14,360 Issuance out of treasury, net of share issuance costs 50,852 1,054 ---------------------------------------------------------------------------- Balance, December 31, 2008 125,562,767 $ 246,357 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NOTE 15 - PER SHARE AMOUNTS (Stated in thousands, except share and per share amounts) Basic (Loss)/Earnings Per Share 2008 2007 ---------------------------------------------------------------------------- Net (loss)/income available to common shareholders $ (70,398) $ 111,817 Weighted average number of common shares 124,725,937 120,724,035 Basic (loss)/earnings per share $ (0.56) $ 0.93 ---------------------------------------------------------------------------- Diluted (Loss)/Earnings Per Share 2008 2007 ---------------------------------------------------------------------------- Net (loss)/income available to common shareholders $ (70,398) $ 111,817 Weighted average number of common shares 124,725,937 120,724,035 Diluted effect of stock options - 2,769,440 ---------------------------------------------------------------------------- Diluted weighted average number of common shares 124,725,937 123,493,475 Diluted (loss)/earnings per share $ (0.56) $ 0.91 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Excluded from the calculation of diluted earnings per share were weighted average options outstanding of 5,678,875 (2007 - 2,844,183) as the options' exercise price was greater than the average market price of the common shares for the year. Also, as a result of the net loss recorded in 2008, all dilutive options are considered to be anti-dilutive and have been excluded from the calculation of the diluted earnings per share for 2008.
NOTE 16 - STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans which are described below.
Incentive stock option plan:
Options may be granted at the discretion of the Board of Directors and all officers and employees of the Company are eligible for participation in the Plan. The option price equals the weighted average closing price of the Company's shares on the Toronto Stock Exchange for the five trading days preceding the date of grant. Options granted prior to 2004 vest equally over a period of four years commencing on the first anniversary of the date of grant, and expire on the fifth or tenth anniversary of the date of grant.
In 2004, the Company prospectively revised the stock option plan so that one-third of new options issued vest on each of the first and second anniversary dates, and the remaining third vest ten months subsequent to the second anniversary date. These options expire on the third anniversary from the date of grant. The compensation expense that has been recognized in net income for the year is $12.3 million (2007 - $12.7 million). The weighted average grant date fair value of options granted during 2008 has been estimated at $4.91 per option (2007 - $5.23) using the Black-Scholes option pricing model. The Company has applied the following assumptions in determining the fair value of options on the date of grant:
2008 2007
----------------------------------------------------------------------------
Vesting period (years) 2.8 2.8
Expiration period (years) 3.0 3.0
Expected life (years) 2.6 2.4
Volatility 44% 36%
Risk-free interest rate 3.3% 4.4%
Expected dividend $ 0.10 $ 0.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has reserved 12,556,277 common shares as at December 31, 2008 (December 31, 2007 - 12,245,038) for issuance under a stock option plan for officers and employees. The maximum number of options permitted to be outstanding at any point in time is limited to 10% of the Common Shares then outstanding. As of December 31, 2008, 9,303,132 options (December 31, 2007- 9,863,531) were outstanding at prices ranging from $1.13 - $30.01 per share with expiry dates ranging from 2009 to 2012.
The following table provides a summary of the status of the Company's stock option plan and changes during the years ending December 31:
2008 2007
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------------------------
Outstanding at the beginning
of year 9,863,531 $ 16.21 10,963,944 $ 12.50
Granted 3,033,265 16.62 2,386,033 20.34
Exercised (3,061,533) 11.39 (3,243,844) 6.45
Forfeited (432,698) 20.61 (242,602) 19.61
Expired (99,433) 21.40 - -
----------------------------------------------------------------------------
Outstanding at the end of
year 9,303,132 17.67 9,863,531 16.21
----------------------------------------------------------------------------
Exercisable at end of year 3,973,740 $ 16.14 4,579,361 $ 10.92
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2008:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------
$ 1.13 to $ 2.92 1,257,610 2.6 $ 2.40 1,257,610 $ 2.40
$ 3.04 to $ 9.60 209,515 2.7 6.53 86,100 3.04
$10.63 to $ 16.74 2,437,350 2.7 16.22 - -
$17.58 to $ 19.78 1,762,101 1.8 19.57 605,978 19.56
$20.46 to $ 30.01 3,636,556 0.8 23.64 2,024,052 24.21
----------------------------------------------------------------------------
$ 1.13 to $ 30.01 9,303,132 1.8 $ 17.67 3,973,740 $ 16.14
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred share unit plan:
In 2004, the Company implemented a deferred share unit ("DSU") plan for outside directors. Under the terms of the plan, DSU's awarded will vest immediately and will be settled with cash in the amount equal to the closing price of the Company's common shares on the date the director specifies upon tendering their resignation from the Board, which in any event must be after the date on which the notice of redemption is filed with the Company and within the period from the Director's termination date to December 15 of the first calendar year commencing after the Director's termination date. The Company has recorded a $0.8 million recovery (2007 - $0.2 million recovery) in the year relating to DSU's and there are 115,343 DSU's outstanding at year end (2007 - 132,900). The DSU liability at December 31, 2008 is $0.9 million (2007 - $2.6 million) and has been included in accounts payable and accrued liabilities.
NOTE 17 - INCOME TAXES
(Stated in thousands) 2008 2007
----------------------------------------------------------------------------
Provision for current income taxes $ 24,369 $ 66,985
Provision for future income taxes (68,636) (35,802)
----------------------------------------------------------------------------
$ (44,267) $ 31,183
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The geographic income before income taxes and non-controlling interest for
the years ended December 31, are as follows:
2008 2007
----------------------------------------------------------------------------
Canada $ 58,633 $ 61,252
Foreign (173,274) 84,404
----------------------------------------------------------------------------
$ (114,641) $ 145,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The net income tax provision differs from that expected by applying the
combined federal and provincial income tax rate of 29.75% (2007 - 32.45%) to
income before income taxes for the following reasons:
2008 2007
----------------------------------------------------------------------------
Expected combined federal and provincial income
tax $ (34,106) $ 47,265
Statutory and other rate differences (19,732) 6,233
Non-deductible expenses 8,379 (8,624)
Translation of foreign subsidiaries 1,386 (8,854)
Future income tax rate reduction (289) (5,322)
Capital and other foreign tax 722 765
Other (627) (280)
----------------------------------------------------------------------------
$ (44,267) $ 31,183
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the future income tax asset and liability as at December
31 are as follows:
2008 2007
----------------------------------------------------------------------------
Future income tax assets:
----------------------------------------------------------------------------
Goodwill $ 58,968 -
Non-capital loss carry forwards 24,367 -
Capital loss carry forwards 1,907 -
Property, equipment and other assets 658 -
Deferred share units 238 662
Other 68 408
----------------------------------------------------------------------------
86,206 1,070
----------------------------------------------------------------------------
Future income tax liabilities:
----------------------------------------------------------------------------
Property, equipment and other assets 45,838 35,246
Partnership income 33,055 26,404
Intangible assets 3,143 3,770
Goodwill - 2,111
----------------------------------------------------------------------------
82,036 67,531
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The non-capital loss carry forwards consist of $65.8 million (2007 - nil) of losses available for carry forward to reduce taxable income in future years. These losses expire between 2022 and 2028.
Accumulated other comprehensive income has been presented net of $1.4 million (2007 - nil) in future income tax recoveries.
NOTE 18 - FINANCIAL INSTRUMENTS
Fair values of financial assets and liabilities
The fair values of cash and short-term deposits, accounts receivable, accounts payable and accrued liabilities included in the consolidated balance sheets, approximates their carrying amount due to the short-term maturity of these instruments. Long-term debt, including the current portion, has a fair value of approximately $216.4 million as at December 31, 2008 (December 31, 2007 - $187.7 million). The bank loans approximate their carrying amount due to the variable interest rates applied to these loans. The fair value of the loan to an unrelated third party included in other assets approximates carrying value based on an assessment made by management (see note 9).
Market risk
Market risk, the risk that the fair value or future cash flows of financial assets or liabilities will fluctuate due to movements in market rates, is comprised of the following:
Interest rate risk
The Company partially mitigates its exposure to interest rate changes by maintaining a mix of both fixed and floating rate debt.
An increase or decrease in interest expense for each one percent change in interest rates on floating rate debt would have amounted to $1.6 million for the year ended December 31, 2008.
Foreign exchange rate risk
As the Company operates primarily in North America and Russia, fluctuations in the exchange rate between the US dollar/Canadian dollar and Russian ruble/Canadian dollar can have a significant effect on the operating results and the fair value or future cash flows of the Company's financial assets and liabilities.
Canadian entities are exposed to currency risk on foreign currency denominated financial assets and liabilities with adjustments recognized as foreign exchange gains and/or losses in the consolidated statement of operations.
Foreign entities with a domestic functional currency expose the Company to currency risk on the translation of these entities' financial assets and liabilities to Canadian dollars for consolidation. For instance, our operations in Russia have a ruble functional currency, and adjustments arising when translating this foreign entity into Canadian dollars are reflected in the consolidated statements of other comprehensive income as unrealized gains or losses on translating financial statements of self-sustaining foreign operations.
Foreign entities are exposed to currency risk on financial assets and liabilities denominated in currencies other than their functional currency with adjustments recognized in the consolidated statement of operations. For instance, our operation in Russia whose functional currency is the ruble will incur foreign exchange gains and/or losses on financial assets and liabilities denominated in currencies other than the ruble.
As at and for the year ending December 31, 2008, the Company does not have an active hedging program. The Company manages risk to foreign currency exposure by monitoring financial assets and liabilities denominated in foreign currency and foreign currency rates on an on-going basis. Exposures to the US Dollar and Russian ruble are mitigated by on-going operations within foreign entities as assets, liabilities, revenue and expenses are denominated primarily in local currencies. The Company also mitigates exposure to fluctuations in the US Dollar by maintaining a mix of both Canadian and US dollar debt.
For the year ended December 31, 2008, fluctuations in the value of foreign
currencies would have had the following impact on net income and other
comprehensive income:
Impact to Other
Impact to Net Comprehensive
(stated in thousands of dollars) Income Income
----------------------------------------------------------------------------
1% increase in the value of the US dollar (434) 3,516
1% decrease in the value of the US dollar 434 (3,516)
1% increase in the value of the Russian ruble 1,349 889
1% decrease in the value of the Russian ruble (1,349) (889)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Credit risk
Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations and as a result, create a financial loss for the Company.
Customer
The Company's accounts receivables are predominantly with customers who explore for and develop natural gas and petroleum reserves and are subject to normal industry credit risks that include fluctuations in oil and natural gas prices and the ability to secure adequate debt or equity financing. The Company assesses the credit worthiness of its customers on an ongoing basis as well as monitoring the amount and age of balances outstanding. Accordingly, the Company views the credit risks on these amounts as normal for the industry. The carrying amount of accounts receivable represents the maximum credit exposure on this balance.
Payment terms with customers vary by region and contract; however, standard payment terms are 30 days from invoice date. Historically, industry practice allows for payment up to 70 days from invoice date. The Company considers its accounts receivable at December 31, 2008 excluding doubtful accounts to be aged as follows:
(Stated in thousands) December 31, 2008 ---------------------------------------------------------------------------- Current (0 - 30 days from invoice date) $ 123,462 1 - 30 days past due 77,144 31 - 60 days past due 23,285 Greater than 60 days past due 12,181 ---------------------------------------------------------------------------- Total $ 236,072 ---------------------------------------------------------------------------- Provision for doubtful accounts 4,436 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company's allowance for doubtful accounts increased $2.8 million compared to December 31, 2007. The Company's objectives, processes and policies for managing credit risk have not changed from the previous year.
Counterparties
Counterparties to financial instruments expose the Company to credit losses in the event of non-performance. Counterparties to cash transactions are limited to high credit quality financial institutions. The Company does not anticipate non-performance that would materially impact the Company's financial statements.
Liquidity risk
Liquidity risk is the risk the Company will encounter difficulties in meeting its financial liability obligations. The Company manages its liquidity risk through cash and debt management, which includes monitoring forecasts of the Company's cash and cash equivalents and borrowing facilities on the basis of projected cash flow. This is generally carried out at the geographic region level in accordance with practices and policies established by the Company.
In managing liquidity risk, the Company has access to a wide range of funding at competitive rates through capital markets and banks. As at December 31, 2008, the Company had available unused committed bank credit facilities in the amount of $35.0 million plus cash, accounts receivable, and income tax recoverable of $56.3 million, $231.6 million and $12.6 million, respectively, for a total of $335.5 million available to fund the cash outflows relating to its financial liabilities. The Company believes it has sufficient funding through the use of these sources to meet foreseeable borrowing requirements.
The timing of cash outflows relating to financial liabilities are
outlined in the table below:
1 to 3 to
Less than less less Greater
1 year than 3 than 5 than
(Stated in thousands) years years 5 years Total
----------------------------------------------------------------------------
Bank loans $ 61,230 $ - $ - $ - $ 61,230
Accounts payable 117,450 - - - 117,450
Deferred consideration 1,572 1,572 - - 3,144
Dividend payable 6,278 - - - 6,278
Long-term debt - 120,000 30,615 91,845 242,460
----------------------------------------------------------------------------
$ 186,530 $ 121,572 $ 30,615 $ 91,845 $ 430,562
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTE 19 - CAPITAL MANAGEMENT
The Company's strategy is to carry a capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The Company seeks to maintain a balance between the level of long-term debt and shareholders' equity to ensure access to capital markets to fund growth and working capital given the cyclical nature of the oilfield services sector. On an historical basis, the Company maintained a conservative ratio of long-term debt to total capitalization. The Company may occasionally need to increase these levels to facilitate acquisition or expansionary activities.
As at December 31, 2008 and December 31, 2007 these ratios were as follows:
December 31, December 31,
(Stated in thousands, except ratios) 2008 2007
----------------------------------------------------------------------------
Long-term debt $242,460 $188,810
Shareholders' equity 719,541 683,669
----------------------------------------------------------------------------
Total capitalization $962,001 $872,479
----------------------------------------------------------------------------
Long-term debt to Total capitalization 0.25 0.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company is subject to various financial covenants associated with existing debt facilities. These covenants are monitored on a regular basis and controls are in place to maintain compliance with these covenants. The Company complied with all financial covenants for the year ended December 31, 2008.
NOTE 20 - CONTRACTUAL OBLIGATIONS
The Company has commitments for operating lease agreements, primarily for vehicles and office space, in the aggregate amount of $20.8 million. Payments over the next five years are as follows:
(Stated in thousands) Payments due by period
----------------------------------------------------------------------------
2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Operating leases 5,862 4,817 4,180 3,180 2,733
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at December 31, 2008, the Company has commitments totaling approximately $12.4 million (2007 - $32.8 million) relating to the construction of fixed assets in 2009.
NOTE 21 - SEGMENTED INFORMATION
The Company operates in three main geographic regions: Canada, Russia (which includes Kazakhstan and Algeria), and the US Each geographic region has a General Manager that is responsible for the operation and strategy of their region's business. Personnel working within the particular geographical region report to the General Manager; the General Manager reports to the corporate executive. The change in internal organization was complete for January 1, 2008. The corresponding information for prior period has been restated to reflect this change.
The Company provides a comprehensive array of specialized products, equipment, services and technology to customers through three operating divisions:
- Canadian Operations provides cementing, fracturing, coiled tubing, nitrogen, geological, and acidizing services, which are performed on new and existing oil and gas wells, and industrial services.
- Russian Operations provides cementing, fracturing, deep coiled tubing, and nitrogen services which are performed on new and existing oil and gas wells.
- US Operations provides fracturing, cementing, and nitrogen services which are performed on new and existing oil and gas wells.
Corporate Division expenses consist of salary expenses, stock-based compensation and office costs related to corporate employees, as well as public company costs.
United
Canadian Russian States
(Stated in Operations Operations Operations Corporate Total
thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31, 2008
----------------------------------------------------------------------------
Revenue $554,554 $295,703 $165,826 $- $1,016,083
Operating income
(loss) 127,234 46,038 28,379 (19,859) 181,792
Interest expense - - - 13,782 13,782
Depreciation and
amortization 40,713 26,495 26,048 138 93,394
Assets 490,659 279,907 395,071 67,303 1,232,940
Goodwill 22,436 13,120 - - 35,556
Property and
equipment 306,761 123,957 201,202 121 632,041
Capital expenditures 48,365 29,544 46,304 170 124,383
Goodwill
expenditures 301 2,988 10,613 - 13,902
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31, 2007
----------------------------------------------------------------------------
Revenue $474,111 $256,628 $105,634 $- $836,373
Operating income
(loss) 115,737 51,517 41,390 (13,553) 195,091
Interest expense - - - 8,596 8,596
Depreciation and
amortization 36,561 13,408 12,738 - 62,707
Assets 470,199 230,364 316,350 32,151 1,049,064
Goodwill 22,135 10,132 135,150 - 167,417
Property and
equipment 313,262 117,627 124,215 - 555,104
Capital expenditures 37,197 72,711 50,270 - 160,178
Goodwill
expenditures 15,119 4,879 161,024 - 181,022
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporate division incurred an operating loss of $19.9 million (2007 - $13.6 million) of which 96% (2007 - 92%) was incurred in Canada as this is where corporate head office is located.
Revenue from one external customer for the year ended December 31, 2008 amounts to greater than 10% of the Company's total revenue. This customer's revenue is exclusively within Russia and totals $157.8 million (2007 - $164.6 million). For the year ended December 31, 2007, revenue from a second customer was greater than 10% of the Company's total revenue. This customer's revenue was earned in Canada and the US and totaled $85.5 million; revenue from this customer was less than 10% of the Company's total revenue in 2008.
NOTE 22 - CONTINGENCIES
The Company, through the performance of its services, is sometimes named as a defendant in litigation. The nature of these claims is usually related to personal injury or completed operations. The Company maintains a level of insurance coverage deemed appropriate by management and for matters for which insurance coverage can be maintained. Management of the Company believes there are no outstanding claims having a potentially material adverse effect on the Company.
Headquartered in Calgary, Alberta, Trican has operations in Canada, Russia, the US and North Africa. Trican provides a comprehensive array of specialized products, equipment and services that are used during the exploration and development of oil and gas reserves.
The Company will host a conference call on Thursday, March 5, 2009 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the Fourth Quarter and Year End 2008.
To listen to the webcast of the conference call, please enter http://events.onlinebroadcasting.com/trican/030509/index.php in your web browser or visit the Investor Information section of our website at www.trican.ca.
To participate in the Q&A session, please call the conference call operator at 1-877-677-0837 (North America) or 416-695-6616 (outside North America) 15 minutes prior to the call's start time and ask for the "Trican Well Service Ltd. - Fourth Quarter and Year End 2008 Conference Call".
A replay of the conference call will be available until March 12, 2009 by dialing 1-800-408-3053 (North America) or 416-695-5800 (outside North America). Playback passcode: 3282283.
The conference call will be archived on Trican's website at www.trican.ca.
Contact:
Murray Cobbe
Trican Well Service Ltd.
President and CEO
(403) 266-0202
(403) 237-7716 (FAX)
Email: mcobbe@trican.ca
Michael Kelly
Trican Well Service Ltd.
Senior Vice President and CFO
(403) 266-0202
(403) 237-7716 (FAX)
Email: mkelly@trican.ca
Michael Baldwin
Trican Well Service Ltd.
Vice President, Finance
(403) 266-0202
(403) 237-7716 (FAX)
Email: mbaldwin@trican.ca
2900, 645 - 7th Avenue S.W.
Trican Well Service Ltd.
Calgary, Alberta T2P 4G8
Website: www.trican.ca
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